Circuit Breaker Kicks In, Stopping Trades of Citigroup

GRAHAM BOWLEY

Wednesday

Jun 30, 2010 at 5:16 AM

Trading was paused for five minutes after a large trade was posted at a price 12.7 percent lower than the previous trade.

An experimental circuit breaker for stock markets that was put in place after last month’s so-called flash crash kicked in for the second time on Tuesday after an erroneous trade caused a sudden plunge in the price of Citigroup shares.

Trading in the shares of Citigroup, one of the most heavily traded stocks in the United States, was paused for five minutes at 1:03 p.m. after an over-the-counter trade of about 8,821 shares was posted at a price of $3.3174, or 12.7 percent lower than the $3.80 price of the previous trade.

The trade was later canceled, according to Nancy A Condon, a spokeswoman for the Financial Industry Regulatory Authority, which regulates brokerage firms. Even so, Citigroup shares closed 5 percent lower for the day, at $3.79.

The circuit breaker rules, put in place across all stock markets two weeks ago on the recommendation of the Securities and Exchange Commission, require exchanges to pause trading for five minutes in any individual Standard & Poor’s 500 stock that moves 10 percent or more in either direction in a five-minute period.

The circuit breaker program, which is being tested for six months, was started in response to a minicrash on May 6 that affected a range of stocks and caused a rapid, 1,000-point decline in the Dow Jones industrial average.

Wall Street analysts said that the halting of Citigroup’s shares on Tuesday highlighted the effectiveness of the mechanisms being tested to prevent disruptive movements in share prices.

“What the S.E.C. has recommended is working,” said Patrick J. Healy of the Issuer Advisory Group, which advises public companies on how and where to list their shares for trading. “Had they done this two months ago, there never would have been a flash crash.”

Until this month, only the New York Stock Exchange had circuit breakers in place on individual stocks. Regulators have said that a lack of common rules across all markets worsened the flash crash, causing it to spread across a broad range of stocks. Automated trading systems analyzed the slowdown in trading on the exchange incorrectly, regulators have said, and kept bidding down prices in hopes of attracting buyers.

The new circuit breaker system was set off the first time on June 16, after the share price of the Washington Post Company nearly doubled in an instant. That movement was also ascribed to an erroneous trade, and the trades were canceled, according to exchange officials.

On Monday, shares of Boeing suddenly fell 44 percent, to $38.77, from $68.77. The trades were later canceled on Arca and Nasdaq, according to the exchanges. This move, however, occurred before the new mechanism took effect, at 9:45 a.m. daily, so trading was not paused.

Despite the new measures, the S.E.C. and the Commodity Futures Trading Commission have still been unable to identify the exact cause of the sharp market decline that shook investors and markets in early May. They are continuing to investigate.

In their preliminary findings, the agencies have said the drop was caused by traders withdrawing from the market during a time of acute market anxiety and refusing to buy or sell, in both the stock and futures markets. The sell-off occurred when global markets were on edge over the European debt crisis.

That market scare underscored how the growth of high-frequency computer trading was affecting market prices. Regulators said those systems could cause an avalanche of automated selling after prices declined by a certain amount.

The agencies said there was no evidence that the market decline was caused by entry trading errors, or by computer hacking or terrorist activity. They added, however, that they could not “completely rule out these possibilities.”

Adam Honoré, research director at the Aite Group, said the new market rules were a step forward. “It provides some assurance in the market,” he said. “Things happen so fast now with electronic trading. You have got to have some mechanism to check the electronic trading, giving everyone pause to work out what is going on.”

He added that he thought the pilot program should be expanded to cover more than the 500 stocks in the S.& P. 500.

Despite the new rules, Mr. Honoré said that price movements were being exacerbated by the fact that exchanges were using different circuit breaker systems. For example, the New York Stock Exchange uses a tighter circuit breaker system than those used by other exchanges, switching from electronic to manual trading when a single stock moves as little as 2 percent on the day.

“This can create a vacuum,” said Mr. Healy of the Issuer Advisory Group. “That makes price falls worse until the marketwide circuit breakers kick in. There needs to be a standardized platform.”

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